CSC2 OMB’s revised Credit Subsidy Calculator for the 2009 President’s Budget

1. CSC2OMB’s revised Credit Subsidy Calculatorfor the 2009 President’s Budget Tyler Curtis Sarah Lyberg CSC2@omb.eop.gov

2. CSC2 What we’ll cover • What the CSC2 is and when to use it • Goals of transition to the CSC2, and challenges for implementation • CSC2 Functionality and Output • Financing account interest • Examples • Summary

3. Credit Subsidy Calculator 2 (CSC2) • OMB tool for performing credit calculations • Incorporates financing account interest and dollar reestimates functionality, previously in Consolidated Credit Tool (C-Credit) and Balances Approach Reestimate Calculator (BARC)

4. Credit Program Overview Agency C-Credit Treasury Program Account Interest CSC Interest repayment C-Credit or BARC Subsidy + Reestimates Budget line Agency Borrowing Principal Financing Account Borrower/ Public Loan Principal repayment Loan repayment(P & I) Budget: Projecting future cashflows with the Public, reestimates Accounting: Recording actual cashflows, execution, financing account interest Different tools at different times meant sometimes inconsistent data used for credit calculations, & tools used simplified interest calculations.

5. CSC2: Goals and Challenges • Goals • Simplify and streamline process • Reduce and reconcile errors • Provide decision makers better information on the cost of providing credit assistance • Challenges • Organization barriers • Reconciliation • Transparency

6. Shortfalls of the old process • Financing account interest calculations: • No reconciliation with cashflows used to calculate reestimates • No formal process for correcting for interest payments/earnings at budget assumption rates • CSC2—one cashflow for both, method for interest adjustments • Traditional approach or Balances approach reestimates: • Methods for technical reestimates of cohort subsidy cost • Traditional approach had no check on accounting errors—unexplained balances in financing accounts • Balances approach could not distinguish between reestimates resulting from borrower performance and accounting errors • CSC2—agencies perform both at once, opportunity to reconcile

7. Three separate tools combined into one Budget subsidy rates Reestimates Financing Account Interest in C-Credit Goals: Streamline the process CSC C-Credit BARC CSC2

8. Goals: Reduce/reconcile errors • Consistent data • Disconnects in financing account balances are transparent • Accounting differences are transparent • Subsidy execution • Financing account interest earnings/costs • Modifications

9. Goals: Better subsidy cost estimates for policy makers • Cost accurately reflects long term cost to government, borrower performance • Transactions to and from public + Intra-governmental transactions = Financing account balance • Corrects disconnects in previous methods • Financing account interest consistent with discounting methodology • Method for financing account interest adjustments

10. Challenges: Organization Barriers Agencies need to start building process • Build in regular communication • Ownership/roles clearly defined • Documentation, record maintenance • Identifying and resolving data issues

11. Challenges: Reconciliation • Calculates reestimates using traditional and balances approach • Calculated vs reported cohort balances • Balances approach (assets = liabilities) • Traditional approach (cashflows to/from public) • Financing Account Interest Adjustments • Differences will require explanation

12. Challenges: Transparency • Accounting mistakes uncovered sooner rather than later • Auditors will see differences • Key is to work now to identify and analyze discrepancies • One-time effort to transition existing cohorts is necessary

13. CSC2 Functionality • Budget subsidy rates • Interest rate reestimates • Single effective rate/cohort interest rate • Financing account interest • Dollar Reestimates • Financing Account Interest Adjustments

14. Financing Account Interest: Review • Credit financing accounts earn interest on balances • Interest earnings are received from the Treasury Financial Management Service • Credit financing accounts pay interest on outstanding borrowings from Treasury • Interest payments are made to the Treasury Bureau of the Public Debt • Cohorts must use the same rate as used to discount cashflows • These earnings and costs affect the deficit

15. Simplified methods Simple interest Average balances Disconnects with reestimate cashflows Consistent with discounting Compound interest Actual cash flows Aligned with reestimate cashflows CSC2: Financing account interest FAIC CSC2 Improved calculations, same requirements

16. Cohort Interest Rate • Financing accounts must earn and pay interest at the same rate used to discount the credit subsidy cash flows for each cohort • For FY 1992-2000 cohorts, this is the disbursement-weighted average discount rate • For FY 2001 and subsequent cohorts, this is the single effective rate, generated by the Credit Subsidy Calculator (in most cases, either budget formulation rate or final rate from the first technical reestimate after 90% disbursement)

17. CSC2: Cohort Interest Rate • Methods for calculating cohort interest rates have not changed • Comes from first technical reestimate after interest rate reestimate • Cohorts that have established actual DWADR/SER continue to use established rate—No need to recalculate • Cohorts substantially disbursed in 2007—use CSC2 to calculate cohort rate • Data requirements are the same as old CSC

18. CSC2: Interest owed • Compute interest owed to the Treasury – Interest owed to the Treasury is based on two categories of transactions: • Debt to Treasury at the beginning of the year includes all borrowing outstanding at the beginning of the year. A full year of interest is paid on such debt. • Transactions with BPD include all borrowings and repayments during the year. Borrowings made during the year are back-dated to the beginning of the year and a full year of interest is paid on the borrowing. Debt repayment and end of year borrowing to pay interest take place at year-end and do not impact the interest calculation. Interest owed is adjusted for repayments that occur at the middle of the year.

19. CSC2: Interest earned • Compute Interest due from the Treasury –based on three categories of transactions: • Cash balances include all cash on deposit with the Treasury at the beginning of the year. • Intra-governmental transfers with the financing account include transfers of subsidy, modification subsidy, modification adjustment transfer, reestimates, interest on reestimates, financing account interest, and interest adjustments. Reestimates, interest on reestimate and interest adjustments are assumed to occur at the start of the year and earn a full year interest. Subsidy transfers and modifications have timing assigned by the user, and interest is earned or paid accordingly. Financing account interest is assumed to be paid at the end of the year. • Transactions with the public include all loan disbursements, claim payments, loan payments, fees, defaults, and recoveries. For these, interest is earned depending on the timing assumption indicated for the individual cash flow line. Outflows to the public reduce the interest earned; inflows from the public increase the interest earned.

20. CSC2: Compound interest • Formula for the PV factor used to calculate interest is (1+ SER) ^ time • SER is the cohort interest rate • Time relative to the LCFY • Example, for a cohort with a 5% rate, a cashflow to the financing account at the end of Q1 would earn 3.73% interest that year • (1+0.05)^0.75= 1.0373 • Debt and cash balances are end of year • Borrowing, repayment, financing account interest and reestimate timing have fixed timing assumptions • Timing for other cashflows are specified by the agency in the cashflow inputs

21. CSC2: Calculating Financing Account Interest • Can be calculated at the same time as reestimates • Can be calculated separately from reestimates • Requires an input cashflow formatted for the CSC2

22. CSC2—Required Cashflow Inputs • Latest completed fiscal year • Reference point--required for financing account interest and reestimate calculations • Cohort Balances • Debt to Treasury/Cash Balance with Treasury • Treasury Transactions • Borrowings and repayments • Budgetary Transactions • Subsidy transfers, financing account interest, reestimates, and modifications—reconciling balances, financing account interest, and reestimates • Historical cashflows with the public • Cashflows in latest completed fiscal year required for ALL cohorts

23. CSC2—Input Cashflows • Reestimate discount rate must be a number • Latest completed fiscal year is a must! • New keywords • Timing for Balance sheet, borrowings, repayments, financing account interest, and reestimates are FIXED. • Debt to Treasury EOY must be entered as a negative • Cash Held by Treasury EOY must be positive • Subsidy and modifications—must specify timing! • Inflows to the financing account are positive • Outflows from the financing account are negative • Upward reestimates—positive, downward--negative

24. CSC2 • Input cashflow • Key changes for input in purple

25. CSC2 Output: CSC2 Tab • 1) Present Value Calculations • PVF relative to the point of disbursement • PVF relative to the latest completed fiscal year • Converted Cashflow—sum of all inflows and outflows to and from the financing account • 2) Reported balances compared to net Cashflows • End of year balance calculated vs. reported • Any difference must be explained

26. CSC2 Output: CSC2 Tab • 3) Financing Account Interest Calculation • Interest owed—Debt balance SOY, borrowings backdated to 10/1, MOY repayment • Interest earned—Cash balance SOY, borrowings backdated to 10/1, MOY repayment, cashflows to and from the account • Net financing account interest—sum of interest owed and interest earned

27. CSC2 Output: CSC2 Tab • 4) Balances Approach Reestimate • Assets vs. Liabilities approach • NPV of cashflows after LCFY • Net EOY debt or cash balance with interest • Difference=reestimate • Financing account interest adjustment included with reestimate

28. CSC2 Output: CSC2 Tab • 5) Traditional reestimate check • Reestimated subsidy rate based off historical and future borrower cashflows • Should generate the same result as BA reestimate • 6) Financing Account Interest Adjustment • Calculates interest that should have been earned/paid on the financing account • Compares to the sum of reported interest, plus section 3 net interest • Any difference = financing account interest adjustment

29. CSC2 Output: Summary Tab • Financing account interest • Reestimate summary (Federal credit supplement) • Current year reestimate summary

30. Summary • CSC2 replaces the C-Credit financing account interest calculator • Same data is needed, different format • Improved financing account interest calculations